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Writing off real estate losses against W2

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  • StarTrekDoc
    replied
    +1 on spiritrider's explanation. Your partner may say it 'works'. Yes, it does -- until the audit. Plenty of examples out there if you don't have the proof, be prepared to pay backtaxes and penalties.

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  • spiritrider
    replied
    Originally posted by Ekanive23 View Post
    Don't have to be professional to claim, need to be "Active Partner" defined by IRS as "regularly, continuously and substantially involved" with the LLC and asset.
    The above only applies if the LLC is engaged in the business of Real Estate. Moonlighting Real Estate rental income in and of itself does not automatically qualify as being engaged in the business of Real Estate.

    Not to mention, your friend is conflating being an active partner with being engaged in a trade or business. Which requires the scope and level of taxpayer activity to be considerable, regular, and continuous. On the other hand, an active partner is one who meets the material participation requirements.

    The Final QBI regulations added safe harbors for being considered engaged in a business of Real Estate in order to take the QBI deduction. There is some disagreement among tax professionas whether those safe harbors only apply to the QBI deduction or can be used generally.

    Bottom Line: In order to deduct losses from the LLC you must either be a real estate professional or meet the burden of proof to be considered engaged in the business of Real Estate.
    Last edited by spiritrider; 01-24-2021, 10:53 AM.

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  • ThatOD
    replied
    Have to be a real estate professional or you could invest in a land conservation easement which is frowned up (to put it lightly) by the IRS

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  • Larry Ragman
    replied
    Of course, the other way to deal with real estate is to focus on the income. The tax benefits are great, and you can deduct 100% of them against passive income if it is greater than the deductions.

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  • StarTrekDoc
    replied
    Yep. SAHSpouse - is the professional real estate is the primary way to qualify. If you're not that, chances are it's not happening and will get disqualified at audit.

    And at audit, they are VERY picky on both the hours and % time. So having 3 homes collecting directly rent - is NOT 15 hours a week demand. There needs to be more. This applies even at the LLC level.

    So much so - Turbo tax separates out the two reports between operating income of the LLC and the real estate costs of the LLC when reporting to make sure the active participation entry is correct

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  • jfoxcpacfp
    replied
    What is your AGI? the only doctors we work with who are able to take this deduction are in residency or have a non-working spouse who is a REP (Real Estate Professional). This is not something I would ordinarily recommend pursuing unless you are planning on creating a wildly popular blog about your experience and monetizing. I have spent far too much time going over the reasons with clients and prospective clients and look forward to the day this fad passes to be replaced by something easier to explain...like conservation easements.

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  • Larry Ragman
    replied
    Your summary at the end is close. Real estate losses are passive and cannot be claimed against W-2 income with two exceptions. Here is a succinct statement. https://www.stessa.com/blog/passive-...assive-losses/

    The fact that you are organized as an LLC is tangential since the LLC is pass through for tax purposes.

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  • Ekanive23
    started a topic Writing off real estate losses against W2

    Writing off real estate losses against W2

    my friend said you can write off losses against a W2. Here’s his two messages to me. If he’s right , great, I just want to know. This is opposite from my understanding. I thought we had to be professional status and our primary job ( or spouses) to do this.

    any help is appreciated. If he’s right, I have a huge gap in knowledge. Any insight is much appreciated by him, my other friends whom I asked first and myself.

    Organized as LLC, building asset of LLC, building depreciation claimed by LLC and then passed through to me, so LLC will be operating at a loss each year and I take that tax break


    Don't have to be professional to claim, need to be "Active Partner" defined by IRS as "regularly, continuously and substantially involved" with the LLC and asset, can then claim up to 25k per year in losses on ordinary income if you make less than 100k and phases out up to 150k, over 150k can claim against other capital gains like stock sales, if you don't use full amount in a year the credit rolls over as LLC, building asset of LLC, building depreciation claimed by LLC and then passed through to me, so LLC will be operating at a loss each year and I take that tax break



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